David Hill, Aberdeen Asset Management’s former COO of fixed income, has launched an OTC derivatives portfolio compression service for the buy-side.
Speaking to The Trade Derivatives, Hill says around nine of the top 15 tier one banks are signed up to the service, called ClearCompress, and is now being extended to clearing clients.
“It now seems appropriate to extend our offering to clients of clearing members since there remains significant pressure on these organisations to compress portfolios but they have more limited industry options readily available to them,” says Hill.
Currently, Icap’s post-trade arm TriOptima dominates the compression market with its triReduce service, which has eliminated more than $750 trillion from the notional volumes of OTC derivatives contracts traded by the top banks.
However, Hill believes there is room for his company to take market share.
“ClearCompress is not the same as TriOptima. Since we target the trade population in a slightly different way, the overlap with a TriOptima-type service is expected to be relatively small. As an example if we identified a $2 billion gross notional compression opportunity, then after a TriOptima run we would still expect maybe $1.5-1.7 [billion] to still be there for us,” says Hill.
“Imagine in the compression space, if TriOptima is the Coke of the compression world we want to be the Pepsi equivalent.”
With increased capital pressures, banks are trying to encourage their clearing clients to adopt services such as compression, according to Hill, as it reduces their total incremental volume and therefore their overall leverage ratio requirements.
“Banks are under pressure to get their clients to compress. What we have done with a couple of them [banks] is discussed adopting a significantly lower per ticket fee for trades designed to be compressed. That makes it more feasible for the buy-side to digest those services and it is a win for the banks too,” Hill adds.
Compression allows traders to remove bilateral trades across mismatched cash flow dates and offset trade populations in order to reduce the size of the cleared portfolio of OTC derivatives.